Where Raw Land is the Investment Chosen by Institutional Investors

Interest in real estate is building again. A survey of professionals finds that, while muted in some respects, institutional and other investors “are in” for 2013.

We tend to look at institutional investors as among the most savvy and informed players in finance. And there is little reason to challenge that maxim.

For those looking to invest in real assets such as strategic land, a report titled, “Emerging Trends in Real Estate, The Second Act: Optimism Returns 2013 Europe,” says that real estate as an investment in Europe is one of the brighter spots in the Eurozone Crisis environment. Half the respondents to the research for this report affirmed that they are optimistic about real estate in very general terms. Relative to institutional investors, the report offers the following:

• Europe largely remains a difficult sell to the more conservative international institutional investors from the United States and Asia, which would have traditionally invested in the region through core funds.

• One in five (21 per cent) institutional investors in real estate businesses say that sustainability (environmentalism) will have an increasing impact on their business, and this isn’t necessarily a negative. “Sustainability is also about how that shopping centre works with the community around it,” said one respondent. “What role are you playing in the local life of that place? This is the next stage of the sustainability debate.”

• Undervaluation of some properties enables productive investments with little risk. “Banks are pricing good assets with just one or two impairments as secondary because they are worried about values falling further on account of these issues. But investors say they’re attractive because all they need is a touch of TLC to improve prospects.”

• “For residential investors, especially in the United Kingdom and Germany, 2013 will be a key year,” says the report, providing the following quotes from survey respondents: “Residential is the best bet, as a basic need” and “We believe in residential assets in stable E.U. countries. This will only get better over the coming period.”

• Developers and institutional investors, as well as REITs, are following the wisdom of small landlords by increasing participation in the private rented sector. The bet factors in a protracted period in which working young professionals may not be able to buy but instead can afford higher rents. Also, “there is a lot of latent demand for purpose-built stock that allows tenants long leases.”

• Local authorities have begun working closely with pension funds and institutions to build housing on public lands to meet the exceptional social need.

So while institutional investors pursue a mix of real estate asset types, there clearly are signs that this is a category of interest and widespread participation. As should be clear, raw land as well as built properties are far from passive and liquid investments - professionals are required to guide the investment through its various stages over multiple years. Individuals who are interested in raw land investment are encouraged to work with professional, independent investment advisors to identify if and when a land investment fits into their investment risk matrix.

*Compiled and reported by the Urban Land Institute and PwC from completed surveys of 500 industry experts, including investors, property fund managers, developers, property companies, lenders, brokers, advisors, and consultants.

Local Planning Authorities Follow Dictates - But Try to Help, Too

The role of the LPAs has increased with the Localism Act. But it’s not all about throwing up barriers. These authorities serve as a valuable resource to investors.

The subject of local planning authorities (LPAs) in British development and community wellbeing is often discussed in adversarial terms. Indeed, there is a tug-and-pull historically in all development, with perhaps greater attention to this in the information-rich Internet era. But in fact the charter of LPAs includes a great deal of transparency in the mission to ensure healthy growth in partnership with investors, developers and builders.

An illustration of the traditional image of planning authorities might be seen among the petitions circulated en masse via the social media site Change.org. The small market town of Barnstaple in North Devon was being faced with a decision on whether a national supermarket should be allowed into the area. The petition cited reasons why locally-owned food retailers should instead be spared the competition.

And such is the lot of the LPAs. But several requirements of UK laws (particularly as made statutory duty in Schedule 4B of the 1990 Localism Act) are referred to as the local authorities’ “duty to support,” realised with workshops, advisories and other means of communicating how development can and should happen. Among these supports and mandates are the following:

Make data available - In the spirit of being evidence-based, state clearly what local housing needs are, how viable new development might be (and according to what considerations), what the flood risks are and what kinds of environmental designations exist. Joint investment advisors can take this information to those considering UK land investment so that they understand the risks and opportunities of specific properties.

Be consistent - Avoid prejudice in providing information, and in meeting with parties who propose and oppose changes.

Be proportional - The scope of the activity (size of project or community affected) determines the degree of attention it is to receive.

Be accessible and transparent - Through all available media, be clear on goals and objectives of local plans and the processes for zoning change considerations and deliberations.

Negotiate between neighbourhoods and the broader plan - Serve in an advisory role on what can be changed and what cannot, in the spirit of helping all to be maximally effective.

Town and country planning are of course the primary concern granted LPAs by the Localism Act 2011, which encompasses imposition of the Community Infrastructure Levy, authorisation of regionally important infrastructure projects, and social housing decisions and provisions.

When developers (and their investors) seek to get a land use reconsideration, it should be in accordance with previously developed plans. At the same time, the cession of decision-making power from national and regional to local authorities was made in part to allow flexibility. Nowhere is this more critical than allowing for and enabling the development of new housing, given the UK’s critical shortage of homes. It still needs to be in keeping with mandates for environmental protection, preservation of ancient monuments and archaeological areas and greenbelt lands, as well as feasible within existing or proposed infrastructure considerations (roads and highways, public transport, schools, water and other utilities).

Land investors largely work with hired specialists who are familiar with the plans and predispositions of the local planning authorities. This knowledge and familiarity with LPA protocol is exceptionally beneficial when, for example, an agricultural property, perhaps in disuse, might otherwise be considered for residential use.

Individuals interested in alternative investment funds such as land would do well to first consult an independent financial advisor. This counsel can help identify where land might fit into a real asset portfolio, and whether a strategic land partnership is the right path to take.

Rooting Out Fraud from UK Land Investment Schemes

How Can an Investor Distinguish Between Legitimate and Fraudulent Land Schemes?

The growth of the population in the UK naturally creates a need for new housing and commercial structures.  But investors need to distinguish fraud from opportunity.

Between 2006 and 2012, The Insolvency Service closed down 82 land investment companies on the basis of fraud that took £60 million of would-be investors’ money with nary a sixpence in returns. But that may be just the tip of the iceberg of losses, as some authorities believe land investment fraud may cumulatively total as much as £1 billion.

How so much and how does this happen? It is hardly a new phenomenon, as investments in worthless land stretches back into history. Land fraud was present enough in the ancient times that it receives several mentions in the Old Testament, specifically Deuteronomy, Leviticus and Psalms. The very first mention addresses the fraudulent movement of a landmark that defines a boundary (Deuteronomy 22:17).

Modern land fraud takes advantage of individuals who are typically contacted by telephone. The pitch plays to a get-rich-quick scheme, hinging on the well-established growth of population, both at home in the UK and abroad, where world trade is opening up land in remote regions for agriculture and resource extraction. Some pitches are for contracts and property that are altogether invalid; in others, an actual tract of land might be sold to the hapless victim, however that land is usually inaccessible or forbidden from development due to proximity to historical or environmentally sensitive property.

To be clear, there are wholly legitimate opportunities to profit from land asset growth. But these are investments that require a significant minimal purchase -- £10,000 or more - and which are managed by professional land investment managers. It is extremely unlikely that such programs would use telemarketing to find their joint venture participants.

That is not to say that individuals pulled into fraudulent schemes are rural rubes. The Serious Organised Crime Agency (SOCA) did a survey in 2005 to identify how scams operate and proliferate. It found the following:

• “Suckers lists” are developed based on past responses to questionable offers; The Financial Services Authority uncovered one such list that contained contact information for 38,000 people.

• A much larger group of people, about 3.2 million adults in the UK, together lose about £3.5 billion in scams of all types each year.

• The profile of the victim may not be what you think. Often, some knowledge of the subject of the scam offer may make the scam victim over-confident in their decisions to participate in the investment. Many have had successful business or professional careers, even if they allow emotion to override good sense in an investment decision. And, their decisions are rarely off-the-cuff; instead, they spend time considering the decision.

• Oddly, these scammed investors often do not discuss the investment with family or friends. They seem to know they will be challenged but are determine to proceed anyway, without validation from others.

Legitimate land investment offerings should be made with a thorough prospectus that accompanies ample information on the professionals managing the investment and the strategies they are following. The population increase in the UK provides many opportunities for land asset growth, as housing is in very tight supply and needs to be replenished with new building. One type of land investment looks at the areas in the most critical need of building, where the investors can work with local planning authorities to seek a land use designation change. Under the right conditions, asset growth can be considerable - but a period of two to five years is typically required to go through planning and infrastructure development.

Investors should always engage an independent financial counselor to determine where land, other real assets and traditional market-traded securities are prudent choices.

What Are the Cost Considerations For Developing Land into Housing in the UK?

Investors in raw land, looking to develop it into much-needed housing, are also responsible for infrastructure development. But to what extent?

For those looking to make alternative investments into UK strategic land, it is worth noting that Conservative MP Nick Herbert raised a few difficult issues - along with unpleasant scenarios - when he published an opinion piece in the Daily Telegraph in late 2012. In it he suggested that some communities are failing to build adequate infrastructure (read: sewers, schools and roads) as they accommodate residential development.

Herbert is quick to acknowledge the pressing need for housing in the UK, as most expressly indicated by Census 2011. But he cites scenarios where inadequate wastewater systems, overcrowded schools and clogged highways show a lack of planning and appropriate resource allocation in the development process. Implicated are, of course, the investor-developer-builder teams who bring about these developments. Herbert introduced an amendment to the Growth and Infrastructure Bill debated in the House of Commons that requires planning authorities to ensure sufficient infrastructure be included in new development.

The costs associated with providing adequate infrastructure in a rapidly-growing population are always a point of debate. Apart from Herbert’s arguments, there are several factors at work in the UK and around the world to consider where it comes to defining what infrastructure entails and how to achieve it:

The UK’s Community Infrastructure Levy (CIL) - Newly created to be faster, fairer and more transparent, the CIL is an option for local councils to charge developers and land owners for the added community costs of new developments. Monies can be used for new roads or road improvements, new health centres and park improvements - per the discretion of local authorities. It also ensures a predictable fund stream that enables effective planning, as well as accountability to local (extant) residents as to how the levy monies are spent. (Note: Herbert is sceptical that this new levy will be sufficient because it carries no mandates for local planning authorities.)

Larger, exurban lots present lowest upfront costs (U.S.) - A paper published in 2009 (Rayman Mohamed, “Why do residential developers prefer large exurban lots? Infrastructure costs and exurban development”) in Environment and Planning B: Planning and Design looks at data from public records of construction costs in South Kingstown, Rhode Island in the U.S. Of course the American approach to development differs and they do not have some of the constraints and levies that exist in the UK. But when the lots are large so too are the prices, while infrastructure costs are only incrementally more. This difference takes on greater contrast when compared to the urban, vertical-built opposite.

But dense cities offer most sustainable complex costs - The “new urbanism” movement popularized in the UK, Europe and the Americas seeks to reverse the suburbanization and ex-urbanization sprawl patterns with a densification of population, transportation, commercialization and city services such as sewers and all other public utilities. The differences from the South Kingstown study (above) is that this looks at the longer-term resource consumption of development (which nets out in favour of densification). Some argue that it creates a lower quality of life, however that is subjective and open to much debate.

Infrastructure in “community assets” - The Joseph Rowntree Foundation (JRF), which endeavours to support resilient communities, argues that community infrastructure ideally incorporates intangibles such as “social capital” (those things that foster connections between individuals), “social networks” (inter-dependencies between individuals and organizations) and civil society (faith-based organizations, political parties, voluntary and community organizations, etc.). JRF makes policy recommendations relative to the affordable housing, with a focus on house price volatility - a matter that is easily connected to sustainable development.

As Herbert, a Conservative, argues in his Telegraph piece, there ultimately is an ongoing juggling act where it comes to infrastructures and its costs, short-term and long-term. “We should not deny young people the chance we’ve had to own our properties,” he says. “But it also means taking care not to damage the countryside. And at the very least, it means ensuring that where such housing is needed, there is adequate infrastructure to support it.”

Be it for market rate, affordable or social housing, significant questions ultimately find answers in those willing to invest in critically needed development. Any and all building will alleviate the pressure from its current state, but of course quality of life issues must be considered along the way. Investors in market housing need to consider all costs - including those cited above - when determining the risks inherent in those investments.

The Controversy of UK Agricultural Land Conversions to Housing

What are seen as the controversies around converting land from agriculture to housing?

The value of UK Green Belt and agricultural lands is undisputed. But the environmental costs of modern farming and housing needs are part of the conversation as well.

Anybody considering making an alternative investment in strategic land will know that Britain unquestionably needs more homes to accommodate a growing population. According to the Office for National Statistics, more than 4.4 million homes should be built by 2016, largely in response to two factors: A decennial growth rate of 7 percent, as measured in Census 2011, and lagging new home construction that fails to keep up with this population increase, largely attributed to the stringent lending standards of banks following the 2008 economic crisis.

At least one group claims the solution is to build on Green Belt land. The Policy Exchange, a centre-right think tank, said in late 2012 that the supply of land near cities that is kept unbuilt is a drag on the housing market. They argue that swaths of English countryside that typically surround towns should be opened up for development. The fourteen Green Belts in England cover about 13 percent of the country, enveloping about 60 percent of Britain’s population (about 30 million people).

The Policy Exchange faces plenty of headwind in its positions. Since the “garden city movement” of the early 20th century, the effort to combat urban sprawl led by such groups as the Campaign to Protect Rural England (CPRE) and the London County Council sought to maintain open spaces dedicated to recreation, forests and agriculture as a social good. But the Town and Country Planning Association has proposed since 2002 the adoption of more flexible policies toward Green Belt lands, suggesting that instead of a growth-stifling “belt,” that “wedges” and “strategic gaps” might allow a natural expansion of urban areas.

Famously, the head of Natural England, whose charge is entirely to ensure protection and improvement of flora and fauna, said in 2007 “we need a 21st century solution to England’s housing needs which puts in place a network of green wedges, gaps and corridors, linking the natural environment and people.”

Agricultural land outside of Green Belts

Of course, land away from the major cities is green as well, much of it in use for agricultural, forestry and recreational purposes. More than 80 percent of the landmass in England and Wales, 12 million hectares, are used for farming and forestry. Local planning authorities can more easily rezone the lands outside Green Belts when market factors, such as the demand for housing development, call for it. Since 2000, about 1500 hectares of agricultural land has been converted to housing development every year.

Of course, similar sentiments understandably still exist relative to the bucolic perceptions of farming in the U.K. But environmentalists take exception to how modern agricultural methods, which include excessive application of fertilisers, can actually burden nature with its by-products:

• Toxic build-up. 100 million tonnes of sewage sludge, compost and livestock manures applied annually to agricultural lands is leading to a build-up of potentially toxic elements such as zinc and copper, and more than half of sensitive wildlife habitat experiences harmful acid and nitrogen pollution, according to a paper published by Environment Agency UK.

• Loss of soil. About 2.2 million tonnes of topsoil is lost each year due to intensive cultivation, some of which is instigated by compaction from heavy machinery and livestock, which precludes plant growth and leads to runoff in rain. (source: Environment Agency UK). To be fair, some runoff is noted as well from building sites before landscaping is completed.

• Water quality compromised. About 70 percent of sediments found in water come from agriculture, and those sediments can carry metals, pathogens, pesticides and phosphates.

Such problems due to modern agriculture plague the planet, as similar pollution levels are reported throughout Europe, Asia, North America and Australia. Africa, Brazil and Argentina, the newer frontiers for agriculture, are expanding arable croplands to meet global food demands but also exhibit a host of environmental sins.

The food-housing tug
There is no denying that the housing needs in the UK must be met - and soon. A whole generation of families are postponing children or living in cramped quarters, awaiting homes they can afford or at least rent to accommodate their members.

But Brits need to eat as much as sleep. So how to balance the use of land for each?

A number of approaches are being tested. One is to encourage development of so-called brownfield lands, which include properties that may require remediation from previous industrial uses. These lands are often within towns or immediately adjacent to them, some with excellent access to existing urban infrastructure while others are cost-prohibitive for a variety of reasons (no existing infrastructure, undesirable locations for housing or extensive environmental remediation required).

Sustainable Build.co.uk is a web publisher that considers the balance between development and environmental sustainability from a very pragmatic standpoint. The site offers several points on how land conversions to development can have a negative effect, which include: converted green fields are quite unlikely to be converted back to nature; there is inevitable loss of habitat for animals and plants; a loss of employment for agricultural workers; and a loss of Green Belt land that provides geographical definitions and separations of cities, towns, villages and hamlets (i.e., American-style urban sprawl).

Answering the problem of diminishing agricultural lands is a nascent movement to small-scale, organic agriculture on greenfield lands. Sustainable Build notes, “There are greenfield sites that are not being used for any purpose, for whatever reason. Development must consider all human and environmental factors, not just consume land and space for short-term solutions. A sustainable vision would look at all the options for land use, human population expansion, urban sprawl, economic considerations as well as environmental needs.”

Which, in a country with a growing population and a concurrent appreciation for the environment, is perhaps the most realistic and pragmatic approach.

Immigration Pushing Up Housing Demand, Land Prices

UK housing and land prices are rising due to immigration and other population factors.

Immigrants to the UK, both ethnic and white, fuel a net population increase. This places price pressure on land and homes, the supply of which lags demand.

For several generations in the Post-War period, the United Kingdom has drawn immigrants from Europe and around the globe. Ethnic populations that have arrived on our shores since the late 1940s have been in concentrations from the former Commonwealth countries – people from the Caribbean, sub-Saharan Africa, India, Pakistan, Bangladesh and China, primarily – as well as individuals of white parentage from South Africa, Australia, New Zealand and Canada. This influx has been unabated in the first decade of the new century, contributing to the 7 percent increase in population recorded in Census 2011.

In simplest terms, increasing population of any kind will drive demand for housing, which these immigration patterns have done. Demand for housing also drives demand for land investment and development, which is currently lagging market needs, a potentially huge opportunity for those looking to get involved in alternative investments. Examining immigrant populations with a bit more complexity, it becomes easier to understand the interplay between immigration, economics and housing demand:

Ethnicity less a barrier to economic ascendancy - While Britain’s storied class structure has diminished a bit in recent decades, there remains a tendency for successive generations to achieve the same social class as their parents. But a series of studies cited by the Joseph Rowntree Foundation in its report, “Migration and social mobility: The life chances of Britain’s minority ethnic communities” (2005) at least finds that this tendency is colour- and ethnicity-blind. The report cites the Oxford Mobility Study (1983), which found that migrant populations, including those of colour, had “a weaker association between origins and destinations,” meaning successive generations fare better economically among immigrants than established populations (this same phenomenon is pronounced in the United States). The classic examples are the immigrants who toil at working class positions while their children achieve university degrees and enter into the managerial ranks.

Home building lags in the UK - The economic downturn since 2007 has certainly put a crimp on home buying and building, but not simply because people have less wherewithal to purchase property. While the population of England and Wales has grown by 3.7 million people in the past 10 years (many of them young and starting families, a point at which home purchases are typical), construction of new homes is remarkably slow. Only about 21,500 new home building starts were recorded in England in the second quarter of 2012, the lowest level in a century and thought to satisfy only about a third of actual demand.

High demand, yet financing is difficult - Younger people, including first- and second-generation immigrants, have difficulty getting mortgages under current financial conditions because they cannot muster a deposit (about 15 percent or more of the value at purchase). Some argue that banks could provide more financing, to builders as well as buyers. This creates a logjam that needs to break, and the sooner the better.

Rents are rising - Average private rents in the UK in mid-2012 were about £750 per month and rising. Higher rents are almost always an indicator of housing demand, and typically a trigger for new building. But the financing problem (see previous item) instead is pushing some builders – financed by insurance companies instead of banks – to build for-let housing.

Note that immigration is not the only factor at work. The Census also identified that pensioners now remain longer in their homes than in the past, a credit to their good health and vitality. We celebrate that fact, but must acknowledge it further exacerbates the housing shortage.

On the whole, this pent-up demand is driving interest in land for development in the future. While brownfield and green belt tracts are considered, undeveloped land appears to be increasingly attractive for development. Many municipalities are turning to their Local Planning Authorities, a product of the Localism Act 2011, to authorize rezoning of agricultural and other-use lands for housing. For many towns, the ability to attract employers includes having a growing population (that is housed, of course). They provide workers as well as consumers, neither of which is available if there is nowhere to live.

Identifying Qualified Land Investment Agents: What To Look For

What qualifies as competency for land investment agents?

Land investments are a promising, alternative means to achieve growth under current market conditions. Working with qualified agents is key to managing risk.

Due to rising interest in alternative investments - a response to the middling performance of market-traded securities - there has also been increased concern about the legitimacy and transparency of many of these assets. For example, the broker-dealer Ponzi scheme of Bernie Madoff may go down in history for both its size of losses as well as its instructive value.

Preceding Madoff’s spectacular debacle in 2008 was the 2005 Langbar International fraud. Here, the Nominated Adviser failed to carry out due diligence while the London Stock Exchange concurrently neglected to check compliance with Alternative Investment Market (AIM) rules.

In the wake of events such as these, many investors - and certainly many investment advisors - have had to increase their skills at identifying where and in whom to seek real asset growth with minimized risk.

Land investments should be approached with the same kind of scrutiny, as should land investment agents. There is increasing interest in raw land, due to how the population increase in the UK has not been adequately met with sufficient home building. The consequential pent up demand for housing is spurring Local Planning Authorities to consider rezoning some tracts of land. To the investor, this is an opportunity to create significant asset growth in a relatively short period of time.

The wary investor is wise to go about this with caution. Several fraudulent schemes have been unleashed on less-sophisticated investors, garnering much attention in the press. But individuals (typically investing a minimum of £10,000) working through a third-party financial advisor should inquire about a property fund’s management team.  That conversation might cover the following:

•    Track record - What successes does the land investment agent have on its record? What about failures, or poor performers?

•    Education/Experience - While many professionals endeavour in the land investment field without a university degree in that specific area, they should have accumulated knowledge in their work. The excitement of rapidly appreciating land values sometimes draws in unqualified people only recently landed in the industry.

•    Expertise - Land investment is not a simple buy-sell proposition. In fact, a team of experts typically needs to work together to turn a property into something of greater value. That includes individuals who can provide the best analysis for selecting land that is ripe for acquisition, for negotiating a workable purchase price, for development planning, site assembly and to strategically time the forward sale, all in the interest of maximum returns.

•    Transparency - All accounting of activities, expenditures, milestones, transactions and returns need to be reported on a quarterly if not more frequent basis, audited by a third party.

Not all variables can be predicted in land investments just as uncertainty exists in all types of investments. With the use of a qualified financial advisor - whose job includes clearing qualified land investment agents - an investor can at least reduce the risk of working with the wrong parties in this alternative investment.

Are Land Investments Affected by the Libor Rate-Fixing Scandal?

How does the Libor rate-fixing scandal affect capital growth investments such as land?

Stringent lending practices by banks are blamed for the housing shortage in the UK. Might the LIBOR scandal, uncovered in 2012, play a role in this?
While residential real estate prices in London remain high and climbing, most other parts of the UK have seen a significant drop in home values since the financial crisis of 2008. Economists and pundits alike have pegged this to many factors in the economy, but since the Libor (London Interbank Offered Rate) rate fixing scandal came to light in 2012, some voices are questioning the degree to which this may have then, and since, affected home buyers. Of course by extension, the ability to purchase homes affects the fortunes of strategic land investors and developers.

A Fortune magazine senior editor wrote in late 2012 that because the housing market crash was due to many homeowners being unable to pay their mortgages, that Libor manipulations “added to the borrowers’ hardships,” making it at least a contributing factor.

Other voices argue that the damage of Libor manipulations benefited just as many people as it may have hurt. As much as rates were artificially inflated, just a bit, so too were they pushed down (driven by the bankers found to be responsible for their own reasons). It should not go without notice that about 45 percent of adjustable-rate prime mortgages and 80 percent of adjustable subprime mortgages are set according to the Libor rate. Student and auto loan rates are hitched to Libor as well.

But if there is one outcome of the scandal, it may have been the undermining of trust in the system overall. It certainly shakes investor confidence in the financial markets.

Billion-pound-plus settlements have been reached by those banks found responsible (Barclays, UBS, Royal Bank of Scotland.  American banks including Citigroup, JPMorgan Chase and Bank of America have not faced charges). And new regulations in the aftermath are predicted, with some variation between countries and their respective regulatory systems. In the UK, that may follow the Vickers proposals, which the International Center for Financial Regulation says will put ringfences around all UK-based retail and investment banking services.

While the punitive settlements reached between UK regulators and the banks sound hefty, relatively speaking they pale in comparison to the costs borne by borrowers since the fraudulent practices began in the early 1990s. According to the website ThisIsMoney.co.UK, small businesses’ and households’ annual mortgages were affected by hundreds of pounds each year due these transgressions. Consider how, says the site, Libor and therefore mortgage rates soared in the lead up to the 2008 financial crisis, particularly its climb around August 2007.

The credit crunch and housing price crash since has slowed investments of all kinds, not the least of which has been home building in England and Wales – despite a continued population increase and pronounced shortage of housing. Would-be new homeowners have difficulty meeting tighter lending standards, which has dulled the interests of most developers in building new homes.

As confidence builds again in the banks, and as lending loosens up, there is growing interest in the pent-up demand for housing that has occurred. In the meantime, to-let housing is becoming more common in the UK and elsewhere, particularly with new construction. The dynamics of banking and business, and the population increase, all suggest that home building has to increase in the future – perhaps this time, with fairer, less-manipulated lending rates. When that does, capital growth for landowners, land investors, and existing built-property owners should benefit as well. On the receiving end, more young people and families will be able to find a place to live – and pensioner parents will reclaim their homes for themselves once again.

For all considered, all market factors must be taken into account. The smart investor will always consult with a qualified personal financial planner to ensure the risk profile of an investment is tolerable and complementary to other assets in his or her portfolio.

Land Investments Relative to Traditional Investments in the Recession Era

How have land investments fared relative to traditional asset classes in recent years?

Investors are disillusioned with the performance of market-traded securities. Raw land is an alternative, but one which has its own requirements and limitations.

In the first quarter of 2013 18 firms resigned from the London Stock Exchange, up from 15 in the same time period in 2012, 10 in 2010 and 12 in 2009. Analysts told the Financial News that these departures since the collapse of Lehman Brothers are due to regulation, austerity measures and shrinking commissions.

Volatility and disappointing performances in traditional market-traded securities has been similarly widespread since 2008. Investors instead have shifted their money to alternative real assets, which range from hedge funds to commodities (agricultural, mineral), precious metals, art and antiques, real estate and raw land.

As one finance and investment advisor, Satyajit Das, told The Independent in March 2013, “Disillusioned with financial assets, the ultra-rich are focusing on scarcity - farmland, prime real estate in world cities with desirable properties, and rarities (fine art, antiques, rare cars). Even wine has emerged as an asset class, giving a new meaning to the term ‘liquidity’”. Das further explained the trick to capturing the benefits of volatility is to take advantage of large price fluctuations, particularly investment capital that is subject to “irrational exuberance”.

In other words buy low, sell high (of course). But what investors are also gravitating toward is the ability to manage the investment, either through knowledge of the asset before purchase - the skilled art dealer/buyer, for example - or in transforming the asset to something of greater value. This latter strategy is characteristic of strategic land development, changing property from one use such as agriculture or a brownfield property into residential use, for example.

This type of land investing differs dramatically from the real estate investment trusts (REITs) available in the UK since 2007. While the REITs have disappointed investors - in fairness, the lifetime of this asset class has existed almost entirely during this recessionary era - raw land provides a niche that investors find a bit more controllable. This is due to three characteristics of successful raw land investing:

• Pent-up demand - With the continued net growth of the UK population (credit immigration, a healthy birth rate and improving pensioner longevity that allows more people to stay longer in their homes), it’s a simple equation to understand that more people need more homes. But due to recessionary economics and stringent financing there are many Brits, younger people in particular, who cannot buy their own homes yet. As government programs to aid home buying and a better economy arrive, that demand will need to be satisfied.

• Working with knowledgeable land specialists - There are few land barons who build their empires on good luck. Instead, investor groups generally hire specialists who understand local economies and local planning authorities, as well as the homebuilder sector that ultimately is the buyer.

• Temporary illiquidity - For the investor, raw land is a difficult-to-exit investment strategy. The typical land investment at a minimum requires 18 months such that investors might instead focus on a three to five year period in which the investment builds in value in preparation for a sale.

While land investments yield varied returns, due largely to the apples-to-oranges nature of location, these three characteristics provide reason for investor confidence and the increasing popularity of the asset class.

Persons drawn to land investment should consult an independent financial advisor who can vet the offer relative to all instruments in the investor’s portfolio.

Should Land Investors Be Encouraged by the Rise in UK House Building?

The story on UK building, as told by statistics gathered by private and public organizations, is mixed. The best advice is to get good advice.

There is a flurry of information regarding construction starts in the UK in 2013 - some of it encouraging, some perplexing. Making sense of it for real asset investing is the challenge of the day.

Much of what the Royal Institution of Chartered Surveys (RICS) predicted at the end of 2012 has come to pass. A pick up in housing starts has indeed occurred, but not until the second quarter after a small drop in the first quarter. Overall for the year, RICS predicted 115,000 new housing starts. But while its unclear where the year will end up, a survey of data from around the UK reveals the following somewhat tantalizing details:

• Glenigan Constructing Insight reports that for all types of construction - private residential as well as social housing, healthcare, education, industrial and infrastructure - activity was up 2 per cent in the second quarter of 2013 (as compared to the same period one year prior).

• Infrastructure leads the way with an increase of 41 per cent growth. By Glenigan’s reporting, large road projects can be credited the most with this.

• Utility building is up 29 per cent.

• Housing starts are up 12 per cent versus 2012.

• Regionally, the West Midlands report an increase of 70 per cent (after only a 10 per cent rise in the first three months of 2013) of all types of construction.

• The South East, which experienced a 20 per cent decline in May was up again by one point compared to 2012, with private housing and infrastructure building responsible for those gains.

• All construction starts in Scotland were down by 37 per cent, an unfortunate trend with similar deficiencies over the previous six months.

• Government investment in health and education are restrained, leading to fewer and lesser-sized projects. The Priority Schools Building Programme might alter this to the positive through 2014.

The chief economist for RICS, Simon Rubinsohn, feels that first-time buyers of homes - rather, the lack of them - continue to be a drag on incentives to build new homes. “Even with the Funding for Lending scheme and some other government policies beginning to be felt in the mortgage market, many first-time buyers will continue to find it difficult to secure a sufficiently large loan to take an initial step on the housing market,” he says. Instead, he thinks the government should act to set up conditions that will increase building of rental or for-purchase housing, and to bring new development quickly onto the market.

This holds special implications for the land-to-housing development investor, many of whom apply alternative investment funds to property funds. While building may appear to be healthy today, there needs to be significant construction of new homes at an accelerated rate just to meet basic demand. But the strategic land investor him or herself must be sure this type of investment is appropriate for their own portfolios. First, they must work with a team of knowledgeable specialists who understand how to manage the entire process effectively. They also need to be willing to wait a minimum of 18 months before they see a return on investment. They also should simply get the advice of a personal financial counsellor who can objectively evaluate the strength of the joint venture land investment.

Property Funds vs. REITs: How Investor Timing Needs Matter

Investor timing matters: Property funds compared to REITs, timing by the investor is everything.

Returns on investment are not the only guide to where one puts their money. The relative liquidity of the funds, and what that means, should be considered as well.
The UK arrival in 2007 of real estate investment trusts - REITs - was heralded as a new era for investors. “For the wider economy, investors are expected to benefit from greatly enhanced dividend payments and growth in the investment property market,” Liz Peach, chiefexecutive of the British Property Federation, told The Telegraph in January 2007. She said it would bring benefits to the British economy as a whole with efficient property use and asset management.

Economic conditions being what they have since 2008, it is difficult to fully ascertain the long-term prospects for REITs in the UK. But the UK-REIT Survey 2012, produced by BDO LLP (an assurance, tax and corporate finance advisory firm), makes several notes about how these types of alternative investment vehicles have fared in the global recession:

• If a UK REIT has a geographic or sector focus (perhaps both), it performed better than trusts that did not.

• Performance was not a function of size (i.e., some smaller and some larger REITs did well, and others of both sizes did poorly)

• A retail property focus - not surprisingly, given the recessionary conditions and reduced consumer spending - tended to cause certain REITs to turn in lesser performances.

What is well understood in mature REIT markets such as the US, where REITs have existed across several boom and bust cycles, is performance of such funds is largely tied to the overall economy and even the ups and downs of daily market trading. Traded like a stock, price volatility is to be expected for the REIT investor.

But that same volatility speaks to another key consideration of the investor: timing.A REIT is an exceptionally liquid investment, which may well suit the needs of one investor over another. In contrast, property funds that commit the investor to a specific piece of property may need to be held for two to five years to appreciate the outcome of the investment.

What is the tradeoff if one chooses a property fund over a REIT? To use a gambling analogy straight out of Las Vegas, a REIT might be characterized as a slot machine, roulette wheel or craps table. A tiny amount of skill is required to get in and the smart player gets out when the numbers fall to his or her favor, if they do. A property fund, in contrast, is more like a good game of poker. Skill and strategy – and a longer period of time playing, typically – help the player achieve a good outcome.

(For background, property funds often deal in the acquisition, site planning and resale of strategic land. The investor is well informed of the property and its prospects for value growth during the projected time period of the investment.)

Individuals interested in REITs or property funds should discuss it with a personal financial advisor. As previously noted, investors’ risk tolerance and timing vary.